PracticalDad Economics: Pay As You Go
With all of the sound and fury in the credit and financial markets, what's the immediate effect on the PracticalDad Family?
A "new" paradigm: Pay As You Go.
The effect of the credit crunch, and as of this writing the credit markets are getting smashed, is that credit will be greatly curtailed to the American family. If you have any unused lines of credit, they will likely be cut or eliminated by the banks and other credit providers. This destruction of credit, faster than the ability of the governmental authorities to replace it, is referred to as deflation. And in a deflationary environment like today's, the general rule of thumb is that "cash is king".
The PracticalDad family has long taken a stand-off attitude towards credit. Mortgage? Yep, but a vanilla fixed rate note. Credit cards? Only one major card offering a college plan rebate, paid off monthly. The preferred operation for service providers - mechanics, etc. - is to go to those offering 90 days "same as cash" financing so that the purchase can be paid off in 90 days without interest.
And I sometimes leave the house without money in my wallet. That way, when the kids start bemoaning their lack of a soda/snack/goody, I can honestly say that I don't have any money. There's plenty at the house and they'll survive until then. If there is an emergency, that's what the credit card is for.
For several years, the typical family has had no savings whatever as they've used the house as a savings vehicle. The expectation was that the housing value would go up and they would be able to tap into it for cash, replacing the borrowed money with the profits when they sold it. Families will simply have to walk through their spending habits and decide what can stay and what has to go as they adjust their spending to the new reality. This could promise to be a searing experience but has to happen as the cash reserves are rebuilt.
And cash will be necessary as the credit is adjusted downwards.
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